By Alex Tapscott
Like millions of other people, I am watching The Crown on Netflix. In one episode, which takes place at the end of 1992, the Queen delivers remarks at Guildhall commemorating the 40th anniversary of her reign. The assembled guests expect the Queen to give an uplifting speech and so are shocked when she instead makes a frank and revealing admonition about the challenges facing the monarchy and the country. In the Queen’s own words, 1992 was an “annus horribilis” – a horrible year. The line became iconic almost instantly.
Well, to use her majesty’s classically understated tone, 2022 is “not a year on which I shall look back with undiluted pleasure.” Indeed, this past year has proven to be an “annus horribilis” for investors who have found few, if any, safe harbours amidst the rough financial seas. Inflation forced the hand of central bankers, who had to jack up rates quickly to stem rising prices. Rising rates crushed bond markets, which were on pace for their worst year on record while the broad risk-off trade drove the U.S. dollar to new highs, at the expense of almost all other asset classes. Yet, in a year when the 60/40 portfolio is in tatters, with U.S. equities and treasuries down approximately 15% respectively, Bitcoin has managed to distinguish itself, falling 63% from its all-time highs to lead all major asset classes to the downside. 2022 was a reminder of Bitcoin’s volatility. Indeed, in 9 of the last 12 years, Bitcoin has been the best performing asset class, but in the other three it was the worst!
There were several reasons for Bitcoin’s poor performance, which we have covered over 2022 in this note and in our weekly podcast, DeFi Decoded. The macro headwind was compounded by the collapse of several high-profile crypto-related businesses, most notably FTX. The subsequent indiscriminate liquidation of positions and de-leveraging caused the bottom to fall out of many assets before stabilizing somewhat. As I wrote for Fortune, the FTX debacle specifically caused a huge black eye. There is much uncertainty on where we go from here. New regulation, which will almost certainly follow in the wake of recent events, may stymie the growth of the industry or provide a surer footing for long term success. Users, stung by these failures, may be slow to return to Web3’s most exciting areas, like DeFi. I recently shared my recommendations for how to put the industry on the right footing for Fortune (read here).
As readers know, I am convinced that blockchain is ushering in a new era of the internet and the web, known as Web3, which I believe promise to transform the economic power grid and the old order of human affairs for the better.
But where does that leave me vis a vis Bitcoin?
My view is that Bitcoin is the native money of the Internet. It is a community-based currency that represents one of the biggest leaps forward in computer science and monetary theory in a generation. It is a store of value and medium of exchange that enables free and lawful peer to peer exchanges of value. 2022 was a year mired by setbacks but also full of positive developments. Web3 showed its resilience and maturity as DeFi weathered the blows which knocked out centralized competitors like BlockFi and Celsius. The Ethereum Merge was successful and will help unlock greater enterprise adoption of digital assets.
I am also bullish because daily I see how investors of all sizes are steadily accumulating Bitcoin. During the absolute worst of this bear market, the number of wallets holding at least 0.01 Bitcoin has steadily hit new highs. The amount of Bitcoin on exchanges keeps hitting multi-year lows, as investors park their assets for the long run causing a supply shortage of readily tradable coins. In this week’s Quantitative Analysis section, we share data on how many mid-sized investors who hold between 1 and 10 Bitcoin has hit new highs recently as well. Individuals are acquiring Bitcoin and businesses may be next: The Financial Accounting and Stability Board proposed new accounting rules for digital assets which should come into effect in 2023, making it easier for companies to hold digital assets, which will remove a big obstacle to enterprise adoption. I recently shared my thoughts in Fortune on this important catalyst (read here).
Ultimately, we are only beginning to scratch the surface of Bitcoin and Web3’s potential. Americans and Canadians this past year got to experience the sting of high inflation, something many people all over the world have suffered with for generations. Indeed, today over 2.1 billion people are living in a country with inflation over 7 percent. Bitcoin continues to be used as a lifeline for the unbanked, and those suffering under the yoke of oppressive regimes. It is used as a store of value in countries with high inflation, like Turkey and Venezuela. It is used to fund unpopular and lawful actions like some protests and lawful but difficult to execute transactions, like funding the Ukrainian military to fight the Russian invasion. It is also the global reserve currency for a new industry and web stands to benefit from other Web3 innovation.
Sometimes the most obvious decision is the best one. Bitcoin is down 63% YTD and 77% from its all-time high. The last time this happened was 2017-2018. In 2019, Bitcoin was up 87% and led all asset classes. So if history is any guide, let’s close the books on our annus horribilis and prepare ourselves for an annus excellentis!
